Minnesota restaurants are grappling with how to adapt to a new state law that will ban them from adding fees to customers' checks.
Why it matters: The so-called junk fees law begins Jan. 1 and prevents businesses from tacking on all kinds of charges at the end of a transaction.
The one most people will quickly notice is at restaurants, where adding a 3%-5% health and wellness fee has become common in the Twin Cities.
The new law allows restaurants to add an automatic gratuity, but it must be clearly labeled and go to the wait staff. It also allows taxes, shipping and delivery charges to be added.
State of play: California this year became the first state to ban junk fees, but Gov. Gavin Newsom exempted restaurants at the 11th hour. That means Minnesota will be the first state to ban restaurant fees.
DFL backers say the measure provides price transparency and allows consumers to make informed decisions by seeing the total cost of a good or service upfront.
The intrigue: Restaurant owners told Axios they are faced with this question: Do they eat the lost revenue or increase menu prices during the dead of winter, when dining slows in Minnesota?
Restaurateur David Fhima (Maison Margaux, Fhima's and Mother Dough Bakery) said he hasn't decided what to do. He uses a 5% fee to help pay for employees' health insurance, which he said is set to rise 40% this year.
What they're saying: Fhima agrees with banning hidden fees, but said they're labeled on restaurant menus ahead of time, unlike, for example, fees for hotel resorts or concert tickets.
Kim Bartmann (Barbette, Pat's Tap, Book Club and others) said she was the local first restaurant operator to offer health care to employees back in 1993. Her costs have risen at least 10% a year, she said, but more like 20%-30% most years.
She's planning to raise menu prices.
Larkin Hoffman attorney Matthew Bergeron, who advises operators, said he expects most restaurants to do the same, but many of them will communicate to customers that the increased prices are to cover benefits for their employees.
Friction point: Big questions remain about catering and banquets. Typically, customers sign a contract that includes several fees, but operators don't know if they can add those to the bill afterward — even though they were agreed on up front, said Angie Whitcomb, CEO of Hospitality Minnesota.
Whitcomb said her organization is going to be asking for changes to the Minnesota law once the Legislative session begins Jan. 14.
What we're watching: How customers perceive menu price hikes at restaurants that have removed fees.
A $15 cheeseburger will still cost $15, but the menu won't say it's $14.25.
These thoughts are all reasonable but there are two problems:
1: Human psychology. Showing a smaller price on the menu (or on the shelf label) has proven to be effective at getting consumers to choose your good or service over those of your competitors even in the face of paying a higher final price. At a larger and more convoluted scale this is what Walmart and Amazon do; one of the reasons they can show a lower price than their competitors is that they have become adept at offloading the true cost of the good in ways that are difficult or impossible for the buyer to see. Walmart, for example, has been widely reported on for intentionally paying employees a wage that qualifies them for state support where they live, and sometimes even helping employees through the legwork to actually receive that support. This saves face for Walmart because they look like they’re supporting their workers in ways their competitors don’t; but that support really comes out of tax revenue collected by the state. So when somebody buys stuff from Walmart, they’re actually paying more for the good than they realize, and importantly this works because the shelf price is still better than competing stores. You can see this all across retail. We like to think ourselves clever when we catch it, like pointing out that $9.99 and $10 are functionally the same, but it still appears to be exceedingly effective: most people will take the $9.99 unless they have a reason to stop and think about it, and largely we’re all occupied with matters that feel more pressing than whether the extra cent is worth it. When we can even see that the trick is in play.
2: Capitalism. Competitive markets imply winners and losers, which in turn means that if your competitors are doing something to attract consumers (like showing a lower sticker price) and you are not, your business will quickly become unsustainable and die from lack of patronage. For restaurants especially the market is extremely competitive, so restauranteurs tend to act in ways that are heavily influenced by paranoia about what other restaurants in the similar lanes (location, cuisine, price range, atmosphere, etc) are doing at the time.
Those two points together lead to a situation where, as “invisible” costs like kitchen supplies or employee healthcare continue to rise, the pressure on any given restaurant to find ways to hide those costs from the consumer continues to grow. We can observe restaurants reacting to this in a variety of ways. Some cut their hours to only provide service during the times when they reliably see the most traffic. Some cut staff and try to do the same work with a smaller pool of labor. Some are lucky and manage to build brand followings that make them more resilient to this pressure, and can confidently raise their prices to some degree without losing a meaningful amount of business. And I think we can see pretty clearly that for many, hiding the true price behind junk fees has been an effective tactic to keep people coming in the door.
None of that makes the practice ethical or worth supporting, but it’s also not going to go away just because consumers would prefer to see the full price up front, because that preference doesn’t cause enough people to stop visiting restaurants that use junk fees. What you want only matters insofar as it drives change in your spending patterns, and as far as we can see right now, it looks like the use of junk fees attracts more business than it drives away. Thus, as much as we might hate it, it doesn’t seem like it will truly go away until one of the problems listed above changes; even in the face of anti-junk-fee regulation, the continual pressure means that somebody will eventually discover some new way to hide the true price from consumers, and then that too will spread throughout the market.